The harder I work the luckier I get!
Samuel Goldwyn
Another rainy day; another miserable commute home. Kelly had experienced this same drive from home to work and back again five days a week for more than 20 years. The trip that used to be a pleasant 20-minute jaunt had more than doubled to 40–60 minutes each way, every day. Daily she experienced gridlock and careless, angry drivers who darted in and out of congested traffic at more than 20 miles per hour over the speed limit. It was maddening and frustrating. Road rage was real.
Reaching her 20-year anniversary with the same company in northern Virginia, or NOVA, as the locals liked to call it, was a milestone for Kelly. The 20-year mark was significant because it meant that she was vested for retirement benefits. Although far from retirement age, she did not want to spend two hours every day on this busy and dangerous road. She had toyed with the idea of consulting for the past two years, knowing that her cybersecurity expertise was in demand.
But how could she switch careers? And what would she charge? She had tried a few calculations. “Let’s see, my current salary is almost $120,000. When I divide that by 50 weeks and 40 hours per week, the answer is $60 per hour. Hey!” she thought, “I’ll be the boss, so I’ll give myself a raise! $75 per hour should do it!” Hooooonk!! “Great!” she thought, “Another crazy NOVA driver! I guess I’d better focus. The rush hour is at epic proportions today.”
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What should you charge clients? Determining your fee may be your most difficult decision as a first-time consultant. However, it is a decision that you must make before you can begin to solicit business. Your client will most likely want to know, “What will this project cost me?”
I moderate panels and speak at conferences about consulting. The two topics new consultants most want to discuss are salary and finding clients. We’ll discuss several aspects of marketing in Chapters Four, Five, and Seven. But first let’s address the emotion-filled topic of setting fees.
As the chapter title suggests, putting a price on your head is about dollars and how to make sense of your value. Figuring it out has two parts:
Although the two questions are closely related, it is important to keep them separate in your mind. If the two amounts are relatively close or if clients are willing to pay you more than you require (what an exciting problem to have!), you’ll find it easy to balance your budget. On the other hand, if you suspect that you require more than clients are willing to pay for your services, you may want to reconsider opening a consulting practice. Let’s examine both of these questions and how they converge on a solution for you.
You can determine how much income you require as a consultant in one of two ways. The first is to calculate in detail your salary, taxes, benefits, and business expenses for one year. A second way, the “3 × Rule” (pronounced “three times rule”), will provide a quick estimate of your requirements.
Recognize that both of these calculations will be based on where you are today. Many consultants believe that you are limiting your potential income with these calculations. My thoughts are that you need to start someplace and starting from where you are today is as good as anywhere. And of course you should have a vision that takes you far beyond. For now, let’s begin with today.
Your perceived value is one way to start. What do you believe you should make in a year? Starting here makes sense because an annual salary is the way most of us think of our value. Don’t forget benefits, including insurance, retirement contributions, self-employment taxes, and vacation time. You may identify each benefit individually or simply add on 25 to 33 percent as an estimate. After that, develop a budget for running your business. Exhibit 3.1 will help you remember most of your expenses. In addition to annual expenses, you will have some one-time start-up costs. Chapter Four provides more details about these. Use Exhibit 3.1 to estimate the amounts you will need to cover your salary, benefits, taxes, and business expenses. Remember to consider profit also. Ten percent is a good place to start. Total these to determine how much money you will require annually.
Exhibit 3.1 Calculating What You Require
| Your Salary for One Year | Total Salary | __________ | |
| Your Benefits | |||
| Health insurance | __________ | ||
| Life insurance | __________ | ||
| Disability insurance | __________ | ||
| Retirement | __________ | ||
| Total Benefits | __________ | ||
| Taxes | |||
| Self-employment | __________ | ||
| Social Security and Medicare | __________ | ||
| State income tax | __________ | ||
| City tax | __________ | ||
| Personal property tax | __________ | ||
| Total Taxes | __________ | ||
| Business Expenses | |||
| Accounting, banking, and legal fees | __________ | ||
| Advertising and marketing | __________ | ||
| Automobile expenses | __________ | ||
| Books and resources | __________ | ||
| Clerical support | __________ | ||
| Copying | __________ | ||
| Donations | __________ | ||
| Dues and subscriptions | __________ | ||
| Entertainment | __________ | ||
| Equipment | __________ | ||
| Interest and loan repayments | __________ | ||
| Liability insurance | __________ | ||
| Licenses | __________ | ||
| Lodging (nonbillable) | __________ | ||
| Materials (nonbillable) | __________ | ||
| Meals | __________ | ||
| Office supplies | __________ | ||
| Postage | __________ | ||
| Professional development | __________ | ||
| Rent | __________ | ||
| Repairs and maintenance | __________ | ||
| Telephone, Internet | __________ | ||
| Travel (nonbillable) | __________ | ||
| Utilities | __________ | ||
| Total Business Expenses | __________ | ||
| Planned Business Profit | __________ | ||
| Total Required | __________ |
If you don’t want to take time now to identify your business expenses, the 3 × Rule will give you a close estimate. The 3 × Rule is used by many consulting firms to determine how much to bill clients (and in some cases how much business to generate as well) in order to pay salaries, taxes, and insurance; cover overhead; and contribute to profit for the company. For example, consultants with a salary of $100,000 are expected to bill at least $300,000 each year. Does this seem excessive? Do you wonder what happens to all that money? You already know that $100,000 is earmarked for your salary. The other two-thirds pays for fringe benefits, such as insurance, FICA, unemployment taxes, worker’s compensation, and vacation time; overhead, such as marketing, advertising, electricity, professional development, telephone, supplies, clerical support, and management; downtime, those days when consultants are traveling, off for a holiday, or in training; and for development and preparation time. The additional money also covers days that cannot be billed due to an inability to match available consultants to client dates.
If you plan to work out of a home office and you do not plan to hire support staff the first year, you might be able to whittle your requirements down to a “2 × Rule,” but your budget will be tight and you may experience cash-flow problems. (More about cash flow in Chapter Six.) Be cautious about playing a tight numbers game.
Consider what is unique to you as you decide how much income you require. Are you the primary breadwinner in your family? Can someone else pick up some of the slack as you are starting your business? What can you contribute from your savings as you start your own consulting practice? Many experienced consultants recommend that you have a 6- to 12-month cushion. What consulting projects can you count on immediately? How long will it take to generate additional consulting projects? Are you planning a life style change?
As the gig economy rolls on, many companies offer “consulting contracts” as a way to ensure continuity of completing current projects in progress. This may be an ideal scenario for you. It usually means that you are responsible for specific projects identified by your former employer for which you receive an amount that is likely a little more per hour than your former salary. You would not be expected to be on-site full time and you can use the rest of your time to generate and conduct other consulting projects. Generally these agreements extend for less than one year and are nonrenewable. Many budding consultants find this an ideal way to start.
If your company doesn’t offer a consulting contract option to you, you could take the lead and suggest it to them. I had something similar happen when I started my consulting business. I was leaving a position where my department manager, two colleagues, the department administrative officer, and I were all leaving within a few months of each other. The organization asked me to stay on for six months to transition the five new people into the workplace. In exchange, they offered me a couple of consulting projects that they needed to pursue. It was a win/win. I received the starter consulting assignments required to provide instant cash flow; my former employer used my experience and corporate knowledge to quickly complete desired projects.
Okay, so now you have a ballpark figure of what you will need your consulting practice to generate the first year. Let’s explore how you decide what to charge.
Deciding how much to charge is difficult because there is an emotional aspect to it. Sometimes it may feel as if it is tied to your value as a person. In addition, you may feel modest and not want to charge too much, but you also cannot afford to charge too little. Here is how to decide how much to charge for your services.
Charges are determined by many factors. The greatest determining factor is the client: the business or industry, the size and location, the demand, and the history of consultant use. The next determining factor is the consultant: the level of expertise, the amount of experience, and the person’s stature. This unique supply-and-demand situation creates a wide price range. I’ve worked with consultants who have charged as little as $200 per day and as much as $75,000 for a one-hour speech! So what’s realistic?
The type of client determines acceptable fee ranges. Generally, for-profit companies have more in their budgets for your services than do nonprofit organizations. Usually, the larger the company, the larger the discretionary funds available. Consultants tend to keep a close hold on what they charge. When discussing fees with my colleagues, I find that daily rates for consultants working in the corporate arena are the highest. In the past two years I haven’t talked to anyone who is using less than a $1,000-per-day starting point. Another of my colleagues charges $6,500 per day for his Silicon Valley clients—of course, he has a unique expertise and many years of experience. In addition, he generally charges by the project. Government, nonprofit organizations, and associations are usually lower, in the $600 to $4,500 range. And, of course, it depends on what is included in your daily rate.
The larger the company, the larger the discretionary funds available.
Also check your market area for organizations offering services similar to yours that may be priced much lower. For example, a local health clinic or hospital may offer a stress-management class for $20. A community college may offer a time-management course for $35. If either of these is your specialty, you may have a difficult time convincing companies to pay $1,500 per day—even if you do customize the materials for them. We’ll discuss the value you provide later.
The location of either the client or the consultant will also affect the fee charged. Ranges are different in different areas. It is natural to expect that consultants in large cities such as New York, Boston, or Frankfurt will charge more than consultants who work in smaller towns. In fact, in the United States, consultants on both coasts command a higher fee.
A wide variation exists internationally, too. In countries where it is difficult to find local experts, there is a willingness to pay the fee consultants request. However, as local citizens acquire skills and expertise to close the gaps, local consultants are taking on more of the consulting work—and charging lower fees proportionate to the local economy. This causes the demand for international consultants to decrease. I’ve experienced this in China and Peru. In general, the highest consulting rates occur in North America, Western Europe, Africa, and Australia/New Zealand. The lowest are in Eastern Europe and South/Central America (Hofferberth and Urich 2015).
Finally, your consulting foundation determines the fee. What expertise do you have? How long have you been in your specialty area? Is it unique or commonplace? How much experience do you have? With what type of clients? Do you work internationally? Nationally? Statewide? Locally? How well known are you? What perceived value do you add due to your stature in the business, authored books, or university affiliations? The answers to each of these will help to determine your rate.
You probably realize that some consultants charge more for one day than you may presently make in a month. And that is, of course, where you’d like to be. How do you determine what you should charge? You’ll want to do some benchmarking to understand the implications of your rates. Determine how you compare with others in your area of expertise and in the location of your primary client pool.
You can determine a fee in one of two ways. You can start with the requirements you compiled and plan toward that end or you can approach the problem from the standpoint of what the market will bear.
To use this method, return to your calculations to obtain the amount that you need for living and business expenses for one year. Think in terms of how much billable time is actually available. There are 52 weeks in a year, and you will probably take off at least two of them. In addition, in the United States you must account for New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving, Christmas, and other holidays. If you live in another country, use those holidays. This leaves about 49 weeks or 245 days, assuming a five-day week. If you live in China or another country with a longer or shorter workweek, make those adjustments.
Generally, you will average between two and three billable days per week or a maximum of 120 days per year, for two reasons. The first is that the work you must do is not all client-facing. You will need time to run your business. You need to market, network, write proposals, travel, bill clients, and complete many other administrative details required to manage a business. In addition, you will need to develop your skills, learn new techniques, and keep up with the changes in your field as well as the industries in which you work. As a consultant you must maintain your professional edge.
The second reason it is highly unlikely that you will bill more than 120 days in one year is the difficulty of matching your clients’ needs with your available days. You may find that all your clients need you the same week in September—a month that is notoriously busy in our field. You may need to turn down some of those billable days. Then again, you may find yourself with a week or two in December with no billable days. Exhibit 3.2 will help you to determine your actual billable days.
Exhibit 3.2 Actual Billable Days
| Days in a Year | 365 |
| Weekend Days | – 104 |
| = 261 | |
| Time Off | |
| Vacation, personal (5–15 days per year) | –_______ |
| Holidays (6–12 days per year) | –_______ |
| = _______ | |
| Marketing (1–2 days per week) | –_______ |
| Administrative (2–4 days per month) | –_______ |
| = _______ | |
| Down time (15–30 percent) | –_______ |
| Days you expect to work |
Let’s return to Kelly and use her thought process. Kelly currently makes $120,000 per year and thought that if she charged $75 per hour she would be giving herself a raise. I stated that it would be highly unlikely that consultants can bill for more than 120 days in one year. Eight hours per day for 120 days equals 960 hours. Multiply that by the $75 “raise” Kelly gave herself and you see that she will make $72,000 and take a 40 percent cut in pay!
Let’s take Kelly through a better scenario. Her $75 per hour is roughly $150,000 for a year. But she is now an employer and her salary is only a part of an employer’s expense. Let’s add $27,000 for self-employment taxes (about 18 percent). Kelly’s company had a 5/10 contribution plan for her retirement. Kelly will now pay the full 15 percent or $22,500 for retirement. She will also pay for various kinds of insurance. This will vary greatly, but let’s just add a rough $15,000 for health, disability, and life insurance. This brings Kelly’s total to $214,000. Surprising, isn’t it?
Let’s suppose that Kelly will begin by working out of her home. That means she can expect overhead to be low for the first year, about $2,000 per month or $24,000 per year. Now the total amount that Kelly must bill is $238,000. Next Kelly divides the total dollar amount, $238,000, by the 120 days of consulting. This gives Kelly a daily rate of $1,983.33. Most consultants would round that figure to $2,000 for each billable day. Are you surprised?
You should consider one last thing. A successful business makes a profit each year. Don’t confuse your salary with your business profit. A profit is your reward for business ownership and the risk that it incurs. A 10 percent profit is very respectable for a first year in business, so Kelly may want to set a goal of $20,000 as a profit margin. This, of course, increases what she will need to bill for her first year.
Of course, we don’t know the details of Kelly’s situation. For example, her spouse may have health insurance, so she would not need that expense. Or she may want to have an office, which increases her expenses. Although we used the average of 120 billable days, she will have to hustle to bill that many days. Few consultants bill that many days the first year, unless their present employer will retain them to complete existing projects or they have client agreements before quitting their current jobs.
Nation1099 has produced an online rate calculator where you can plug in the numbers of your own situation to estimate your minimum requirements. I recommend that you try the advanced version for increased reliability. You can try it at nation1099.com/freelance-rate-calculator.
Does $2,000 per day sound high for Kelly’s first year in the field? It may be. She may need to return to her original budget. Can she cut expenses? Could she do all her own design work instead of using a temporary service? Can she forego her “raise” this first year? Can she decrease the amount required to live? For example, she could skip the expensive vacation she’s always taken. Perhaps she could use some of her savings for living expenses? Think about Kelly’s situation. Any of these will change the equation to lower her billable rate. Use Exhibit 3.3 to calculate your consulting fee.
Exhibit 3.3 Calculating Your Fee
Daily Fee: What You Require / Days You Expect to Work = Daily Fee $__________/__________ days = $ __________ per day Hourly Fee: Daily Fee / 8 Hours = Hourly Fee $__________/ 8 Hours = $ __________ per hour |
Although this exercise is an excellent way to determine your billable rate, you must also consider what a client will be willing to pay for your services. You certainly do not want to price yourself out of the market your first year!
By the way, we’ll explore why daily or hourly rates may not be the best pricing strategy, but for now it gives us a way to make equitable comparisons for how to determine a billable rate. In addition, it gives you a basic unit of measure for other calculations.
An easy way to establish your fee is to emulate your competition. Place a price on your head by determining what you believe the market will bear—that is, how much you believe your targeted clients will pay for your services. Realize that you are not charging what you are “worth” but what clients are willing to pay. In his classic book The Consultant’s Calling, Geoff Bellman (2002) says, “We are not talking about what you and I are worth; we are talking about what you and I can get. … Your ultimate value as a consultant or as a human being is not being put on the line in this negotiation.” This is an important distinction. Your fee does not measure your actual worth, but only what clients are willing to pay for your services. Geoff goes on to say, “You can’t put a financial value on who you are, so don’t mix up your struggles about personal worth with your efforts to sell your services.”
As a new consultant, you may want to collect as much information as you can about what clients are paying for services and what consultants are charging for services. Don’t be surprised if this information is difficult to obtain. If you are still employed, perhaps you could to do some covert data gathering before you leave to learn what your company pays for their consultants. I have found most consultants to be quite private about what they charge. Of course, you need to pay attention to the Sherman Anti-Trust Act to ensure that you will not be accused of price fixing!
You may feel better about your value if you find out what you are worth at payscale.com. You can input information about yourself, for example, where you live, where you graduated, your certification and degrees, and number of years of experience to calculate a current compensation analysis. You will get the basic information for free or a more detailed salary report for a six-month membership fee. Two other sites you may wish to visit for insight are salary.com or indeed.com.
If you decide to follow what the market will bear, you will want to explore some other issues to help you determine your fee. Ask yourself these questions: What’s your specialty? How common is your expertise? How many alternatives does the client have? What is unique about your experience? What industry are you targeting? What size organization will you serve? What constitutes a typical consulting fee for companies in this industry? Where is your market? What is the range of fees organizations pay in this market? Who else offers similar services? What do they charge? Use Exhibit 3.4 to help you sort through the factors that will determine your rate. The more Xs in the left column, the higher rate you will be able to charge.
Exhibit 3.4 How Much Will Clients Pay?
| Place an X in either the left or right column next to the item that most closely describes you and your potential clients. | |
| My Consulting | |
| __Expertise in high demand | __Minimal demand for expertise |
| __Stand out; a specialized niche | __Lots of competition in my area |
| __More than 20 years in the industry | __Fewer than 10 years in industry |
| __High name recognition | __Little name recognition |
| __Rare area of specialty | __Specialty readily available |
| __Published work is well known | __No published work |
| __My confidence level is high | __Hey! I’m just starting this! |
| __Offer customized solutions | __Offer content with minor tailoring |
| My Clients | |
| __High-operating-margin industry | __Low-operating-margin industry |
| __For-profit organizations | __Nonprofit or government |
| __Large organizations | __Small organizations |
| __Large cities | __Small city |
| __U.S. coast locations | __U.S. Midwest |
| __High use of consultants | __Minimal use of consultants |
| __Urgent; burning issues | __Not time-sensitive |
| Total ___ | ___ |
Like the 3 × Rule, the 1% Rule will give you a quick and dirty estimate—but in this case for what to charge. The rule, popularized in Marion McGovern’s (2017) book Thriving in the Gig Economy, states that taking 1 percent of your salary gets you quite close to an estimated daily rate. So in Kelly’s scenario, she was aiming at a salary of $150,000. One percent would be a $1,500 daily fee. I’ve always found this formula to come up a bit short, which means Kelly would need to work more than the 120 average number of days each year in order to pay for insurance, taxes, overhead, and so forth. The 1% Rule is just another way to gauge what you may want to charge.
Whether you decide to plan with the end in mind, go with what the market will bear, or use a combination of the two methods, you must still select a pricing strategy. Your figures will result in a range, so you will have to determine whether to charge closer to the high end or the low end of the range. Experience shows that most new consultants select the lower price. They feel that if they price low, they will find more contracts to start out. I did that. Worried that I wouldn’t have enough work and basing my fee only on my current salary, I started by charging $350 per day. I was busy! I felt as if I were in a revolving door, doing something different for a new client every day. I had no time between clients to prepare.
Pricing services too low is the biggest mistake new consultants make. Besides a lack of time, it opens up other issues. You may work long hours and not make the amount of money you deserve for the job. Your long hours to scrape by may not allow enough time for you to grow your business or to develop yourself. A low bid may help you acquire some early projects, but may also be a reason that clients are uncomfortable hiring you again—especially if the project was not large enough to develop a solid relationship.
If your price is too low, you may be inadvertently telling clients that you are not as good as other consultants. You want your clients focused on the value for the services that you will provide. Adding all these together means that your attitude will eventually suffer. Achieving the reputation of being the cheapest consultant in town means only that you are “the cheapest consultant in town”! The only thing a low rate should provide for you is a walkaway rate, that is, the rate below which you will not work.
Choose the high end of the range—for several reasons. First, the higher price means that you will need to accept fewer contracts. This allows you to manage your time better, giving you the flexibility to deal with all those unforeseeable things that crop up when starting a business. It also allows you to spend more time with your clients, giving them better service, rather than worrying about your next contract. You may experience a longer buying cycle, but the wait will be worth it. Charge a price that allows you to do the job with superior quality.
Charge a price that allows you to do the job with superior quality.
Second, your consulting rate sends a message. True or not, a higher price often is equated with higher quality. A low price may send a message that you are not worthy of important projects. At one point in my career I was overwhelmed with requests from clients. I thought that if I increased my rates I’d have fewer clients. It didn’t work. The message I sent with a higher rate was that I produced higher quality! My plan backfired! And more clients wanted to work with me.
If your consulting time is booked solid, you may be charging too little. You may need a new strategy that defines who you won’t work with and what you won’t do.
Third, unless your price is radically different, clients care less about your price than you may imagine. If you are stressing out over pricing, stop. In most cases, if you offer what clients need, they will most likely pay the price you request without questioning it. They want you to solve their problem. Don’t let pricing detain you from moving forward.
The discussion so far has focused primarily on a daily fee. There are other possible pricing structures. Often the industry you serve or the kind of consulting you do will determine the pricing structure you choose.
Training, organization development, or management development consultants typically charge by the day. That day may be 6 to 12 hours long, depending on the task at hand. If you are conducting training that begins at 8 a.m., you will probably need to arrive before 7 a.m. to set up the room—or even set it up the night before the session. The session may last until 4:30 p.m., but participants may stay around to discuss the day with you. After they leave, you may still want to organize the room and your materials for the next day, study your notes, or examine work that was generated by the participants during the day. It may be 6 p.m. before you leave for the day. An 11-hour day may be the norm, and you do not charge overtime for the additional hours.
Billing by the day may make you seize as many days of work as possible—even when they don’t fit into your schedule well. When a day has passed without a billable client, you have lost that income potential forever. Billing by the day limits your earning power to the number of days in a year. This puts strong emphasis on days worked as opposed to results achieved. Remember that a billable day is a billable day; once it’s gone, it is lost forever.
A billable day is a billable day; once it’s gone, it is lost forever.
Consulting fees charged by the hour are standard in some industries, such as computer programming, accounting, legal, and engineering. It is also often required in government projects that require proposals priced for auditing purposes. In some cases, you may provide a range of hours (minimum and maximum) you expect the job to require. Travel time is not generally billed in any of the other methods of charging; it often is in the hourly rate structure.
Jenn Labin, a consulting colleague, offered this advice in a recent email to me: “The work we do as consultants is valued more highly than just the number of hours we put in. I prefer to bill on a project basis; however, I may bill on an hourly basis when it’s the organization’s preference and I clearly understand the context of the project, I am confident of the process and technology that will be used, and I am certain that the scope boundaries are stable.”
Both a daily rate and an hourly rate require the client to assume the risk for the total cost of the project. Thus, they are more typically used for training or tasks that have clearly defined time parameters and outcomes. Depending on your consulting projects, hourly rates can be the most limiting in how much you can earn. If not, clients are penalized if the consultant is slow and consultants are penalized if they are efficient! It’s important to communicate clearly and regularly about the number of hours that are accumulating.
Establishing a firm price for a complete project is how I prefer to bill. Specific results are identified for the completion of a project. Although some consultants resist this method of pricing, due to the risk involved if the price is too low, my experience shows that this is the trend. Tom Peters says, “It’s a project-based world. If you’re not spending at least 70 percent of your time on projects, you’re living in the past” (Peters 1997).
You may have to bid on a fixed-price basis if you work for government agencies. Responding to a Request for Proposal (RFP) from any organization may also require you to determine a fixed price for an entire project. But it may also require you to break the work down to show how much you are charging per hour. An RFP is often used when several consultants are competing for a job.
I prefer this pricing structure for several reasons. First and most important, the client’s employees can call at any time for assistance and, unlike my attorney, I won’t start the timer. Second, the method is performance- and results-oriented. We are paid for what we accomplish. Third, this method is the best match for a custom design. Fourth, this method is better for larger contracts. Several large contracts are easier to manage than dozens of little ones.
How can you determine a price? First, estimate how much time you expect the project to require. If this is your first time with this method, you may still want to use a daily rate to find a ballpark price. With this method, you assume the risk of the total cost of the project. Ethically, you cannot charge more than the original quoted price—even if you lose money. We have lost money on a couple of projects due to poor estimating. In these situations, we have always continued to provide the highest-quality work and have not disclosed our predicament to the client. This would be unprofessional. It certainly taught us good estimating skills quickly!
The one drawback is scope creep. That’s when your client asks you to do more than what was agreed upon. These things happen because neither you nor the client will be able to predict everything. This can be managed easily, as long as you bring each of these additional client requests that go beyond your original agreement to your client’s attention. At that point, you can both decide how to manage the new requests. They may be included in the project at an additional fee or they may be left for a later time.
Charging by the number of participants who attend a session is another way to look at pricing for a training consultant. It is typically used by trainers offering public seminars, although there may be a few nonprofits that like to contract this way, too. Government agencies may want you to use this type of fee structure because it more closely matches their budgeting structure. If you do choose this method, consider an up-front agreement that you will be paid for a minimum number of participants. In other words, if you require payment for a minimum of 18 and only 16 people attend, you will still be paid for 18.
Of course you should also specify a maximum number of participants. I deliver training for talent development professionals in China, where it is critical to specify the exact maximum number you will accept. I remember conducting a two-day session that was supposed to be for 35 participants. As I was setting up, I thought we had a very large room for 35 participants. And then I learned why. As the session began, 50 additional people started to stream into the room, standing against walls and sitting on the floor around the perimeter! My contract had been interpreted as “35 official participants” who would be seated at tables and as many unofficial spectators as would fit in the room!
I see more and more retainer arrangements. A retainer establishes a set fee that the consultant receives on a regular basis, generally monthly. A retainer works best if you’ve already completed one or more initial projects with your client, because it allows both of you to get to know each other and the business culture. A retainer, or pay for access, typically covers a span of 12 months. The client is assured that the consultant is available on an as-needed basis. The client and consultant determine an approximate amount of time that will be required monthly. Given enough advance warning, the consultant is expected to respond. The work may be on-site, on the phone, or both. The advantage to the consultant is a regular income; the drawback is that the consultant must plan around the needs of the client. I charge my coaching clients this way.
Some organizations pay a fixed price to a consultant on the completion of a clearly defined task. This method may be used by search firms in executive recruiting, where the conditional fee is paid only after the recruiting consultant provides the organization with four qualified candidates for a specific position.
Pay for performance fees are used when the financial outcome of the project is easily and clearly measurable. The consultant agrees to a percentage of the financial success of the project. This method works well for sales or marketing consultants. The client and the consultant agree that a percentage of the financial gain or savings will be paid to the consultant. A consultant can do very well with this arrangement, and the client is assured that the consultant will focus on the bottom line. There are a few drawbacks. First, the consultant will not have insight into whether the client is manipulating results. A client may not implement everything that you recommend, thus compromising your ability to reach a maximum payout. Finally, the results may not be measurable until some time after the project has been completed. In this case, you can require a start-up fee prior to beginning the project.
Some consulting gurus may lead you to believe that if you are not using value-based fees, you are a dimwitted amateur. Value-based fees are based on the value you contribute to the results of a project. So if you agree to a 10 percent value-based contract, your fee is 10 percent of the success of the project. You are paid for the value you create. For example, you might convince a client that you can generate $5 million in savings, or profits, or new revenue. If you have agreed to be paid 10 percent of the success of the project, you would receive $500,000. Plus, you probably will agree to annualize the results and be paid into the future, too. It’s an advantageous arrangement in which you act as a true partner with your client. Sound too good to be true? Unfortunately, economics isn’t that simple or most consultants would be using value-based fees. Yes, there are a few successful consultants who have a unique skill set or capability that most in the market do not have—and, of course, that the client needs. Most of us must admit that there are others in the profession who can provide the same services to our client, and some at a lower price.
No matter which pricing structure you choose, your fees must be based on how much you require as well as how much the market will bear.
Many other decisions must be made around pricing. You must be clear about what you think about the following before you can discuss costs with a client.
If you have decided to charge by the day, you must determine what constitutes a day. If you attend meetings at your client’s business from 10 a.m. until 3 p.m., is that one day? If you work on a project in your office from 7 a.m. until 7 p.m., is that one day? Do you count hours? Do you count calendar days? How will you define one day? Although we typically charge by the project, when we use daily rates we charge for one calendar day no matter how many hours beyond eight we work. No matter how you determine the length of a day, be sure to decide prior to working with clients.
What if a client needs you on-site for four hours and you are basing your charges on full-day rates? Should you charge half your regular rate? We recommend that you charge more than half. Why? First, you will spend the same amount of time going to and from the site. Second, you will probably spend the same amount of time in preparation. And, third, this billable day is spent! You have little chance of using the rest of the day in billable work. So what can you do? You may wish to bill for something more than half a day’s rate but less than a full-day rate. Or you may wish to do as I do, which is to charge a full-day rate, even for a half-day event.
Your price may send a message to potential clients about your expertise. I notice consistently that new consultants tend to establish fees that are lower than the market would bear. An astute client will question whether you can successfully complete the project at the rate that you have quoted.
We do not charge for writing proposals. We see it as a cost of doing business. If we initiate a sales call, we do not charge for the time or expenses. Nor do we charge if the client requests a visit and it is local (within a two-hour drive). However, if the client initiates a sales call that will require an overnight stay or airfare, we do request payment for out-of-pocket expenses. To open this discussion in a professional manner, I usually say, “Would you like us to make travel arrangements and bill you at cost? Or would you like to make the travel arrangements and let me know what they are?”
Work that you complete for free is good for your business, good for the community, and good for your soul. I set aside at least 15 days each year to do pro bono work for professional organizations such as the Association of Talent Development, volunteer groups such as the American Red Cross, or schools and government agencies that cannot afford to pay. In these cases I do not charge a reduced fee. I tell them that I have only two fees: my client fee and free. The more you give, the more you get. Try it.
Besides your billing rate, you will incur extra charges that will be reimbursed by the client.
Travel, lodging, and meals are generally an additional charge to the client. Bill your client for the same amount you paid. It may be a common practice in other professions to tack on a “handling fee” for expenses, but it is not accepted in consulting. You will be expected to provide receipts for your expenses. If you work for government agencies, you will hear the term per diem, which refers to a preestablished daily rate that has been determined for the city in which you are working. This fee, allowed by the Joint Travel Regulations, is expected to cover your lodging, meals, tips, and sometimes local travel. If you are traveling on a per diem basis, find out what it is prior to making your travel arrangements so that you can stay within the maximum amount allowed.
There are three possible ways to handle charges for materials that will be used during the consulting project: (1) materials can be included in your daily fee; (2) materials can be an additional charge to the client and can appear as an additional line item on the invoice; or (3) materials can be provided or produced by the client. When a contract includes many repeat sessions, you may help clients to save money by providing them with masters for the materials and allowing them to make their own copies. This saves you time and eliminates your need to transport materials for each session.
Most consultants’ fees include the cost of overhead. However, some larger firms itemize the charges for administrative tasks, data entry, editing, data analysis, and other off-site activities. Some firms also track and charge for telephone calls and other correspondence. Although it is unlikely that a start-up consultant will do that, you should be aware of this practice. If you ever find yourself competing on a daily or hourly rate basis with one of the large consulting firms, and you wonder how they can charge less than you, dig deeper. You will find that the firm’s total sum will most likely be greater than yours due to all the additional charges.
Given most organizations’ greater emphasis on part-time, contingency, and freelance work, some consultant groups suggest that clients should also bear the cost to hire. Within the organization, this includes all the expenses for recruiting, hiring, onboarding, and training employees. I am not advocating this for now, because this “savings” is one of the advantages that consultants can use to sell their services to organizations. Let’s keep an eye on the future to see what occurs.
Will you charge for travel time? A very small portion of consultants itemize travel time as billable to the client at a reduced rate. Most consultants simply consider it a cost of doing business.
If you believe setting your initial fees is difficult, wait until you are faced with increasing your fees. You will have many questions on your mind: “Will they pay more?” “Will I lose some of my clients?” “How do I tell them?” First, remember that an annual increase is normal and expected. It just makes good business sense.
When I first started, I charged a daily rate because that was the kind of work I was getting. I remember sitting next to the Elizabeth River with a friend, trying to decide whether I should increase my fees from $750 to $800 or $900. In the end my friend convinced me to go for $1,000! Turned out to be easier than I thought.
Although I’ve never experienced a negative reaction to fee increases, I know that some consultants have. An increase in your fees may result in a loss of clients. However, if you give your clients enough time to adjust their budgets and you’re not increasing your rate by an astronomical figure, your clients will most likely understand. A six-month notice is generally considered fair, ethical, and appropriate. We tell our clients about an increase verbally, then follow up with a written note. In addition, we include a reminder with the first invoice at the new rate.
This is one time that you cannot overcommunicate. And, by the way, don’t apologize for a rate increase. Instead, tell your clients how much you appreciate working with them and that you would be happy to answer their questions. This is a critical time when you need to be clear about your pricing strategy.
How do you know that it’s time to increase your fees? You’ll know when you are so busy you don’t have time to increase your fees! It’s a simple matter of supply and demand—or so I once thought. As I mentioned earlier, at one point in my career I had about twice the work I could handle, so I increased my fees. In fact, I doubled them, thinking that my projects would be cut in half and that I would break even financially with less work. That didn’t happen. My plan failed! Instead, when I raised my fees it created a perception that I was more valuable! Raising my fees actually increased business.
Are you too busy to have lunch with a friend or working on proposals every weekend? Then it is time to evaluate your fees. Yes, you may lose a couple of clients—but then, isn’t that the point? To free up some of your time? It is noteworthy that in today’s gig economy, many consultants try it for the lifestyle, but stick around for the money.
Are you too busy to market to a better client base? Increasing your rates may force you to market to clients who can pay more. Review your business plan. Are you really working with your dream clients? Those who can pay your new rates and who have the ability and the need to hire you again and again?
Let’s pause for a moment here. This conversation isn’t simply about your fee, increasing your fee, or even what you are going to do for the client. You should not focus on the tools, the processes, your services, and what you do. Instead, focus your discussion on the value you bring to them. This helps your client to see the results they will achieve when they hire you, such as reduced cost, increased profits, a competitive advantage, or many others. Focus on the benefits and the value they want.
Sometimes when you increase your rates, your proposals are bumped into a new category, requiring approval by a higher level of management. This is good, because higher levels in any organization generally have larger budgets and more discretionary funds. A difference of $13,000 one way or another is not as critical to a vice president as it is to a line manager. Lesson learned? Don’t underestimate yourself. If you add value, the work will be there.
If you add value, the work will be there.
For another perspective, be sure to read Geoff Bellman’s book The Consultant’s Calling. I’d like to be able to tell you to read just one chapter, but I can’t do that. The book represents a philosophy, and to appreciate its holistic nature, you need to read the entire book.
Although Chapter Nine is dedicated to the ethics of consulting, three issues about pricing ethics deserve to be mentioned here.
The highest compliment that I can receive from a client is to hear that we are trusted and ethical. The fastest way to undermine that trust is to price inconsistently for different clients. To ensure that this does not happen, identify a clear and consistent pricing structure for all of your clients. Charging one client $1,000 for one day of training and another on the other side of town $1,500 for the same type of training will cause problems. Clients get together at their industry professional meetings and share what they are doing. You do not want them to discover a difference in your pricing.
Some situations do exist in which you might not charge the same for all clients or for all work, but be certain that these occasions are clearly spelled out in your pricing strategy. Be certain that you adhere to your own strategy. Three situations in which you might charge different prices follow:
The point in each of these three examples is that there is something different—something unique that justifies a different pricing strategy. The key word here is strategy. Know your strategy and stick with it.
Although we all love a sale, consulting is not a postseasonal business. It is unethical for you to lower your rates simply because clients do not have adequate funds in their budgets to cover the amount you first quoted. How could this happen? You determine that your rates for the project will be $15,500. The client responds that there is only $10,500 in the budget for the project. It is very tempting (especially if you don’t have any work lined up for the next few weeks) to say, “Okay, I’ll do it for $10,500.” This is one of the ways that consultants gain a bad reputation. If you can do it for $10,500, why did you ask for $15,500? Does that mean that you had $5,000 worth of fat in the proposal? It will make a client question your ethics and the ethics of all consultants.
The only way that you can lower the price of an original quote is to eliminate some of the services, so that there is a true trade-off for the services you offer. For example, you might say, “We could do it at the lower price if you print the training materials there, compile the evaluations yourself, and provide all the equipment.” Or you might eliminate a more valuable service, saying, “We could do it at the lower price, but it would mean that I would not spend a day at your company interviewing people in order to customize the participant materials.” When I take this approach, two things usually happen. First, I feel good about myself when I do not succumb to the monetary temptation. Second, the client usually does not want to give up the service and most often says that the money will be found someplace.
If neither of these types of suggestions works, be prepared to walk away from the project. I have walked on at least a dozen occasions. Every time, the clients called me back to say they could “scrape up the money” somehow. I’d like to believe that something greater occurred. I believe that I was educating the client about appropriate consulting ethics.
Don’t sell yourself short. If you find that new clients often ask you to reduce your rates, you may want to research the marketplace in which you are working. Have you priced yourself above what the market will bear? If yes, you have at least two choices. First, you may want to lower your prices. To do this, you may need to decrease the services you presently provide to clients or decrease your cost of doing business. Second, you may want to locate another market in which your fees are more competitive.
The ethics of increasing your rates are even fuzzier than those for reducing your rates. If you are up-front and candid with your client, it’s probably okay. Why would you raise your rates? I can think of at least two reasons: The client wants the task completed in a ridiculously short amount of time, or the client insists on using you for a project that you dislike.
In either case, you are most likely justified in quoting an increased fee—especially if you are candid in your explanation to your client.
During discussions with your clients, you may want to take the responsibility for bringing up the topic of cost. Talking about money is difficult for some people. Take the lead by saying, “You probably want to know how much this will cost.” When I open the discussion, I often see relief on the client’s face—grateful that I brought up the subject.
Sometimes during that first discussion, you may see potential complications with the project, an unusual timeline, or something unique that you haven’t done before. This may make it difficult to price the project on the spot. In this case, you can say, “I’m not sure of the price at this time. Let me go back to my office and put a proposal together that will outline a work plan and the cost. I will have the proposal on your desk tomorrow.” This buys you time to plan the project and to price it appropriately. Don’t allow yourself to be forced into providing a “rough estimate.” An exact figure the next day is better for both you and the client. Naturally, you must live up to your promise to deliver the proposal and price quote when you say you will.
If you are just starting your consulting practice, you might consider offering a 100 percent satisfaction guarantee. If the client is not satisfied with your work, you will return the full amount. Sound risky? It shouldn’t. If you don’t believe in yourself, who will? If you don’t believe in your ability to meet and exceed clients’ needs, perhaps you are considering the wrong profession. You should not be practicing on clients. You should know your abilities and be able to guarantee the job.
If you don’t believe in yourself, who will?
I’ve offered a 100 percent money-back guarantee from my first day in the profession. Many of my first clients gave me a chance because the guarantee provided reassurance that I was confident in my ability to complete the project successfully. If I wasn’t successful, they wouldn’t have to pay. Since that time, many have said the guarantee made the choice easy. As one of my clients from NASA said, “It was a win no matter how we looked at it!”
A guarantee does two things for you and your business. First, it makes it easier for the clients to say “yes” to you. They have nothing to lose. Either you accomplish the task that needs to be done or it doesn’t cost them a thing. Second, it tells the client that you are confident and competent at what you do. What better way to begin a consulting relationship?
A guarantee tells the client that you are confident and competent at what you do.
Establishing your fee and pricing structure may be the most difficult decisions you must make in the business of consulting, but it’s not impossible. Don’t let it prevent you from moving forward.
Putting a price on your head is one of the most difficult decisions that you’ll make as you transition to consulting. Consider these thoughts to increase your pricing confidence and to help you make sense of the dollars.
Set a Rate You Deserve with Confidence. Price your work commensurate with the value you bring to your clients. The emotional stakes are seldom as high as we may imagine. Your clients are less concerned about your consulting fee than about whether you have a solution for them.
Don’t Discount. Working from home does not justify a discount. You are still as smart, as experienced, as reliable, and as results-oriented as you were when you worked in a cubicle. You deserve a sufficient salary, the ability to pay your bills, and a profit for your risk. Your clients are not doing you a favor by hiring you. You provide them with value and they pay you a commensurate sum.
Scout About. Learn as much as you can in as many ways as you can by asking other consultants about their fees and fee structure, obtaining feedback about your pricing when you lose a proposed contract, checking out what companies pay for consultants in your area of expertise, and reviewing research results about other consultants and consultant practices.